YNTR: Time for Finance to Turn Down the Heat

 You Need to Read the LSE/Grantham Institute’s Time for Finance to Turn Down the Heat by Nick Robins.

“Warming potential” – putting the estimated climate impact of portfolios into degrees of warming – could be a meaningful way for financial institutions to measure and track climate risk. In May 2019 Mirova research used lifecycle data, estimates of induced and avoided emissions, and the IEA climate scenarios to create a very clear temperature marker for portfolios. Major indexes (S&P 500 and MSCI World equity index) had warming potential around 5.0°C. Knowing that insurer Axa, at 3.3°C and 2.9°C, used the measure to commit to reaching a 1.5°C Paris Accord target (albeit, by 2050) demonstrates its value.

For banks and investors, new metrics are required that show how their balance sheets and portfolios compare with this strategic temperature target. Central banks and financial regulators also need to keep score so that they understand the positioning of individual institutions as well as the aggregate levels across the systems they supervise. The reason is clear: limiting global temperature rise to 1.5°C is the best way to secure the long-term financial stability that is at the core of their mandates.

Individual savers and pension beneficiaries want to be confident that their money is being invested in line with global climate goals. Financial sector leaders need to be sure that their business models are proofed against future policy and technology shifts. And financial policymakers will increasingly require market participants to disclose their warming scores to mobilise capital for the transition and underpin system stability.

Routine disclosure of a portfolio’s “heat-print,” and the ability to aggregate and compare can be used by regulators and investors alike, and should “provide a further stimulus to reallocate capital.”

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